What Does Revenue-Based Finance Mean for SME Credit Ratings?
Written by Team 365 finance
Just like in your personal finances, business credit ratings are an important part of the loan credit application process. In this article, we’re looking at how and why personal and business credit ratings are different, factors that affect them and how to find the right loan credit product for your circumstances – regardless of your business’s credit ratings.
Read on to learn more and discover how to access investment capital to grow your business today.
Why Are Credit Ratings so Important?
Credit ratings are how lenders evaluate potential borrowers. Credit ratings are a quick (but imperfect) summary score of your borrowing history that lets lenders know whether you’re a reliable and responsible party to give money to. They’re important because they help you access loan credit and other types of debt products to finance your growth more easily. In general, the higher the score, the more likely it is that you’ll receive loan credit, overdrafts, etc. and on favourable terms. Suppliers may also look at your credit score to see if you’re a reliable customer, so managing your credit ratings is a vital step in running a successful business.
Loan credit (and other types of debt financing) are just one way that businesses can finance their growth. The alternative is equity financing (where you sell a stake of ownership and entitlement to future profits in return for investment capital). However, equity financing isn’t suitable for every business. What’s more, business owners are often hesitant to sell control over their business and consult other parties – especially if they started a business to get away from all of that. In contrast, every business needs and uses loan credit at some point, so managing credit ratings quickly becomes an important and common part of planning your growth.
How do personal and business credit ratings differ?
Business credit ratings have a few key distinctions from personal credit ratings but also lots of overlap. Before we go into more depth, it’s worth mentioning that these distinctions are only important if you’ve set up a company formally with Companies House. If you’re freelancing as a sole trader or in a business partnership, your business and personal credit rating are the same.
Firstly, as their name suggests, business credit ratings only pertain to the financial health and activity of your business. For this reason, they’re fully separate from your personal credit score. Secondly, the sort of factors that affect your business’s credit rating are slightly different (we go into more depth in the section below). Finally, other businesses can affect your credit score. After all, if they don’t pay you, you can’t pay your bills – so, be careful who you go into business with.
Factors that Affect Your Business’ Credit Rating
As with personal credit score, a combination of things affect your business’s credit rating. The most important of which is whether you pay your bills on time. These include everything from utility bills to supplier invoices and other creditors. If you have late or missed payments, it could have a negative impact on your score.
Similarly, your credit rating will also be influenced by:
Your credit utilisation (how much of your available credit you’re actively using)
How often and how much you’ve applied for credit in the recent past
Whether you’ve exceeded any overdraft limits
Whether you submit your business accounts on time
Any assets listed on your balance sheet
Whether you have County Court Judgments (CCJs) or insolvency proceedings
The above isn’t an exhaustive list of factors and there are some exceptions. For example, some lenders may look at your personal finances if you have very little business history.
What’s more, different credit ratings agencies measure and weigh different factors unequally from one another. This means that you shouldn’t worry about small changes in your credit ratings or discrepancies between providers. Rather, by following responsible business habits over time, you’ll be able to build (or recover) your business’s credit ratings.
What is a Good Business Credit Score to Have?
As mentioned above, there are a number of different credit ratings agencies – each with different scales, measurement frameworks and so on. Experian is one of the largest, so we can use their 0 – 100 scoring system as an example.
In general, a business credit score of 80 or above is considered excellent. Anywhere from 40 to 80 means you may be asked to provide additional information to lenders and other creditors (like suppliers) to help them understand your financial health (especially if your score is on the lower end). Scores of 40 and below mean that your business is perceived as risky, so lenders and creditors may be hesitant to work with you.
The full breakdown of Experian’s scoring system can be seen below:
|Commercial Delphi Score
|Commercial Delphi Band
|Dissolved or serious adverse information such as a liquidator, receiver or administrator appointment, a resolution to wind up, a winding up order, a meeting of creditors or a voluntary arrangement.
|Recent Winding-up Petition or Intention to Dissolve notice.
|Above Average Risk
|Below Average Risk
|Very Low Risk
How Does a Merchant Cash Advance Affect Your Credit Ratings?
When deciding between different financial products, there are always pros and cons to consider. The bad news is that Merchant Cash Advances don’t build credit. So, if evidencing your creditworthiness is especially important, then more traditional loan credit products may be more suitable for you.
However, the good news is that there are fewer barriers to entry for Merchant Cash Advances. As a type of revenue-based financing and unsecured business loan, they don’t require collateral, a detailed business plan or hard credit check. For example, as a merchant cash advance provider, we look at recent customer transactions and apply a soft credit check instead, meaning we don’t just rely on your credit ratings.
Best of all, since we don’t apply a hard credit check when assessing your eligibility, applying for a Merchant Cash Advance with 365 Business Finance won’t affect your score at all. This means that you can apply with little to no impact on your business’s credit rating.
How to Tell if a Merchant Cash Advance is Right for You
Merchant Cash Advances are just one type of debt-based business financing, so it’s important to find the right product for you. As a quick run down, here are just some of the funding options available to you in addition to traditional business loans you’d get at a bank:
- Invoice financing
- Microloans and start-up support
- Business credit cards
- Working capital loans
Working capital loans and invoice financing can be great ways to unlock or access capital and cover day to day costs. Similarly, microloans and start-up support can help you get started but aren’t available to more mature businesses. Finally, business credit cards are a flexible credit tool but often come with high interest rates and can only be used if whoever you’re paying accepts card payments.
In contrast, Merchant Cash Advances are a flexible financing tool available to businesses of all sizes and shapes. If your registered office is in the UK, your business processes payments through a card machine (PDQ)/online payment system and has been trading for at least 6 – 12 months, you could be eligible for up to £400,000.
Merchant Cash Advances don’t come with fixed monthly payments, interest rates or hidden costs. Instead, you pay back a portion of your credit and debit card payments from customers. This means you only pay back what you can afford month to month.
Access Flexible Financing Solutions with Revenue-Based Finance from 365 finance
Don’t let a poor or insufficient credit history be a barrier to your growth as flexible financing options exist for every business. Our Rev&U is easy to apply for and can be in your account in as little as 24 hours – perfect short-term financial support or part of a long-term business plan.
At 365 finance, we can provide both long and short-term financial solutions, with revenue-based funding available from £10,000 to £400,000 in capital. Apply for funding today without affecting your credit score, or speak to our team to find out how we can help your business. To find out more, head to our website.